Chapter4: Utility Maximization And Choice
Section: Chapter Questions
Problem 4.2P
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Question
Eren’s two main hobbies are taking vacations overseas (V) and eating expensive
meals (M). His utility function is given as: U(V,M) = V2M
Last year, the average price of taking a vacation overseas was US$200 and the average
price of an expensive meal is $50. However, due to supply problems in Onions, the
average price of an expensive meal rose to $75. The average price of a vacation did not
change. His income, which is $1500, did not change.
Calculate for the equivalent variation (EV) for the price change.
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